3 tax disadvantages when making S Corp. elections.
S Corp tax elections provide a number of possible tax benefits, however, there are some downfalls to S Corp elections, especially from a tax perspective.
1. Paying taxes at the exit door.S Corps may not be particularly hard to structure, but could create a situation of being impossible to leave an S Corp tax election, due to taxes that may be due to exit. A common example, are C Corps who elected S Corp status, and have significantly appreciated assets, which could trigger taxes upon sale.
2. Paying taxes to enter.In certain situations, mostly involving poor planning, electing S Corp tax status, could create a tax liability for its S Corp shareholders. There can be enormous tax differences, between a stock sale vs. entity sale vs. a merger vs. asset sale.
3. Paying taxes without getting cash.A common departure from the deeply rooted tax principle of ability to pay, being a key factor of determining the tax payment timing rules, lies in the areas of S Corp, LLC and partnership taxation.